REINSURANCE UPDATE

1
REINSURANCE UPDATE

• CAGNY MEETING
• June 2003
• Chris Milton Rich Skolnik

2
Current FutureReinsurance Climate

• Reinsurance Market Players
• Capacity
• Price
• Contract Terms
• Credit Risk
• Rating Agency vs. Regulator

3
Reinsurance Market Players

• Old Money vs. New Money
• Bermuda vs. Europe vs. USA
• Legacy Problems for Old Money
• Asbestos
• Reserve deficiencies
• Growing Pains for New Money
• Staffing
• Distribution

4
Capacity

• Quality vs. Quantity
• Casualty
• Property
• Specialty
• Conditions
• Future Considerations

5
Price

• Soft Market
• Hard Market
• Transition Between the Two
• Cyclic Nature

6
Contract Terms

• Reinsurers Try to Tighten
• Ceding Companies Try to Loosen
• Control Issues
• Collection Issues

7
Credit Risk in Reinsurance Transaction

• Quality of Reinsurers Credit
• Preference in Collection
• Other Collection Problems
• Willingness to Pay
• Ability to Pay
• Counterparty Risk - Admitted vs. Non-Admitted
  - Collaterization

8
Rating Agency vs. Regulator

• Rating Agency Requirements and Concerns
• Regulatory Requirements Concerns
• How the Two Coordinate or Dont

9
Lloyds Market Highlights

• Creation of a Franchise Structure
• Transition From the Current 3-year Accounting to
  Annual Accounting
• The Phasing Out of Unlimited Liability
• 2002 Markets Combined Ratios
• Lloyds 98.6 (Source Lloyds of London
  Global Report)
• European Reinsurers 105.1 (Source CSFB
  13/03/03)
• US Total PC 108.3 (Source Business Insurance
  03/24/03)
• US Reinsurers 121.3 (Source RAA 03/26/03)

10
Lloyds Chain of Security
Individual Members
Corporate Members
2002 2001 Change m

Premiums Trust Funds
Premiums Trust Funds
26,767 19,600 36.6
Strict investment criteria
Funds at Lloyd's 40 of OPL
Funds at Lloyd's 40 of OPL
13,974 11,200 24.8
Other Personal Wealth
438 474 -0.8
Central Fund
903 526 71.7
Insurance of the Central Fund
562 508 10.6
Overall Premium Limit. Ratios are minimum's
from 2002, subject to a Risk Based Capital
loading Plus 690m callable from
Members Annual limit of cover 562m,
subject to 160m annual excess point (with
maximum of 802m aggregate cover over 5 years)
Source Lloyds global results and annual report
2002
11
The Global Reinsurance Market is Dominated by a
Few Key Players
2001 ( in millions)

Top 5 Reinsurance Groups 55,365 Estimated Global
Premiums 96,808 Total 57.2
Source SP
12
Key Concerns of Credit Risk Management Process

• Reporting Issues Exposures are Measurable Only
  Once a Year
• Resources Needed to Monitor 250 Reinsurers
  (Screening Model)
• Choices of Quality Reinsurers are Limited as
  Industry is Concentrated
• What Should be the Maximum Aggregated Recoverable
  Exposure per Reinsurer?
• Rating Agencies Inability to Forecast a
  Reinsurers Downfall
• Curtailment of Cessions to a Reinsurer May Help
  Realize the Prophecy

13
Credit Risk Mitigants

• Strict Minimum Security Criteria
• Guarantees
• Collateral
• Diligent Monitoring of Reinsurers
• Credit Triggers in Reinsurance Agreements -
  Ratio Tests
• - Rating Downgrades
• - 20 Decline in PHS
• - Minimum RBC Ratio
• - Change in Ownership

14
New Bermuda Start -Ups

• Axis Specialty 1.7 billion
• Allied World Assurances Co Ltd. 1.5 billion
• Arch Reinsurance Ltd. 1.0 billion
• Montpelier Reinsurance Ltd. 1.1 billion
• Endurance Specialty Insurance Ltd. 1.2 billion
• Olympus Reinsurance Company Ltd. 500 million
• DaVinci 500 million
• Aspen Insurance Ltd. 200 million
• TOTAL 7.7 Billion

Includes 200 million in capital raised in
October 2002. Source A.M. Best Co. data
15
Capital Increase in Established Bermuda
Companies since 9/11
Company Form Capital Raised Partner Re Group
Preferred Stock 400 million ACE Bermuda
Insurance Ltd. Common Stock 1.1 billion XL
Capital Group Common Stock 725
million Debt 1.6 billion Renaissance
Reinsurance Ltd. Common Stock 233
million Preferred Stock 150 million PXRe
Group Preferred Stock 150 million Everest Re
Group Common Stock 346 million Debt 200
million
Source A.M. Best Co. data
16
Change in Distribution for Top 150 Reinsurers
Worldwide
Number of Reinsurers
Source Standard Poors
17
Reasons for Recent Downgrades of Reinsurers
Worldwide

• Asbestos
• Reserve Deficiencies
• Management Issues (e.g., transitions)
• Reinsurance Uncollectibles
• Investment Write-Downs
• Adverse Development
• Missed/Shifting Earnings Targets

18
Combined RatioReinsurance vs. PC Industry

• 2001s combined ratio was the worst-ever for
  reinsurers
• 2002 was bad as well
• Clearly pressure on reinsurers to improve
  performance

Source A.M. Best, ISO, Reinsurance Association
of America, Insurance Information Institute
19
Trends and Future Concerns

• 70 of the Worlds Reinsurance Premium Suffered a
  Downgrade in the Past Year
• 8 of the Top 15 Reinsurers Have a Negative
  Outlook
• Virtually All Have Raised Equity or Hybrid
  Capital Since September 11th
• Deteriorating Investment Results
• Recognition of Prior Period Reserve Deficiencies
• Asbestos Losses Continue to Materialize
• Stagnant Mergers and Acquisition Market
• Foreign Markets Retrenchment
• SPs Negative Outlook for the Reinsurance
  Industry